Yesterday we reviewed the Fed’s Statement of Operations finding many peculiarities such as: a $16 billion capitalized loss, $2 billion spent by the Board of Governors, and $1.2 billion paid as a dividend to the banks. It also illustrated how the Fed receives money from the government, pays banks and administration fees, thereby grinding down income, only to remit far less money back to the government than it took in.
As for the balance sheet, readers should be familiar with the chart, as of yesterday’s release it stood at $8.593 billion, per below:
Further details are on page 6 of the financial statements, showing a year-end 2022 balance sheet, only four months ago, of $8.569 billion.
The brunt of the Fed’s assets are US Treasuries (UST) of $5.729 trillion and Mortgage-Backed Securities (MBS) of $2.697 trillion, accounting for 98% of the total.
But what does it mean to say the Fed owns (rounding down) $8 trillion in UST and MBS?
Consider it as an IOU the Fed holds, literally pieces of electronic paper that says the United States Government and countless mortgage holders owe the Fed $8 trillion plus interest.
The balance sheet is primarily an accounts receivable balance, perhaps the world’s largest, which is to say that the Fed owns debt, obtained by creating $8 trillion out of thin air and loaning it out. This $8 trillion manifests itself as an increase to the money supply since money must go somewhere and is always held by someone.
A large part of this money has gone into fighting endless wars on terror, drugs, and poverty. It has even gone on to fight proxy wars, funded drone strikes across the globe, as well as post-secondary education. Rather than alleviate poverty, it creates it, due to the inflation of the money supply and the currency debasement that follows. The boom-and-bust cycle it creates, and the asset bubbles it inflates can also be attributed to this $8 trillion.
On the other, seldom talked about side of the balance sheet, are the liabilities:
The liabilities primarily consist of money the Fed owes to others.
We see $2.889 trillion in repurchase agreements, i.e., money owed to financial institutions and $2.684 trillion owed to depository institutions, which the Fed pays interest on. Only $446 billion was held in the Treasury’s general account.
One head scratcher is that there were only $2.258 trillion in Federal Reserve notes outstanding, which Note 3k explains as the “currency circulating of the United States.” When this $2 trillion is contrasted against the M2 money supply of $21 trillion, it’s safe to say that our money has never been in the bank.
The balance sheet invokes many things, one of which is the realization that even though the Fed is not a bank, like a bank, it barely has any money of its own. But it makes sense because anyone having the ability to create trillions of dollars on demand probably wouldn’t keep trillions of dollars in a secured vault either. Most of the money the Fed creates is used to buy assets, which typically means buying debt. This is done in a roundabout way using intermediaries, but in effect the Fed finances the US government and mortgages by increasing the supply of money and credit. Conversely, it’s odd then that the Fed borrows from and pays interest to banks.
One can only hope that the exorbitant costs, both measurable and immeasurable, will one day be understood by the public. If the income statement shows how money is funneled out of the public purse, then the balance sheet shows the malicious monetary technique that turned counterfeiting into a public good. Truly, there would be a revolution before tomorrow morning if everyone understood what government has done to our money.
